Recently, Fitch Ratings affirmed the issuer default rating (:IDR) of American Financial Group Inc. (AFG) at “A-” along with the debt rating on its senior unsecured notes at “BBB+”. Additionally, the credit rating agency affirmed the insurer financial strength (:IFS) rating of American Financial’s principal operating subsidiaries at “A+”. The outlook for all these ratings is stable.
The rating affirmation was based on American Financial’s strong capital and liquidity position, satisfactory financial leverage and a history of outperforming peers in terms of profitability. However, the company’s reducing underwriting profitability in the property & casualty business and the weak interest rate environment are causes of concern for the rating agency. Moreover, the rapid growth in the annuity business amid the low interest rate environment is also concerning, as it could adversely impact future earnings.
Fitch may revise the ratings upward if American Financial’s underwriting and investment results increase to the level of companies with a higher credit rating, its property & casualty reserve adequacy level improves or the company reduces the higher end of the target range for long-term financial leverage to less than 15%.
On the other hand, Fitch may downgrade the ratings of American Financial if the property and casualty combined ratio stays above 100% over the long term or the property & casualty Prism score falls to ‘adequate’. Other factors that could result in a downward revision in ratings are a surge in the financial leverage beyond 30% and a rise in surrender rates or decline in operating results of the annuity business. Further, the IFS rating of the subsidiaries could be lowered if Fitch deems their strategic importance to be reduced.
American Financial currently carries a Zacks Rank #3 (Hold). Other property and casualty insurers worth considering are Cincinnati Financial Corp. (CINF), Arch Capital Group Ltd. (ACGL) and Navigators Group Inc. (NAVG). All these companies carry a Zacks Rank #1 (Strong Buy).
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